Grand MosqueThis article first appeared in the November issue of ‘Business Islamica’ a monthly magazine published in the Middle East specifically covering all aspects of Islamic business and finance both regionally and internationally. Click here for the online version of the magazine.

The  Middle East has “an increasing appetite for credible,Shari’ah-compliant, liquid securities, the Global Islamic Banking Center of Excellence of EY, one of the largest professional services firms in the world, reported recently.

This appetite is being matched by a record year in Sukuk issuance – Thomson Reuters Zawya Islamic reports that USD 85.8 billion sold during the first eight months, up from USD 75.1 billion during the same period last year.

This explains why the Prime Minister of Malta and the Minister of Economy have recently gone on record stating that the Government of Malta was actively considering whether it should issue a Sukuk to see what the reaction of the markets would be and to give a political message that this is the sort of instrument Malta is in favour of.

No Bolt from the Blue

Back in 2009, when giving an overview of the ambitious plans for Malta in the financial services field, the then-current administration had stated their keenness on developing Malta as an Islamic financial centre, confirming this administration’s interest in expanding its growing financial services industry offering to the Arab world.

“Malta is comfortable with the Arab world and the Arab world trusts and engages with Malta”, the then Prime Minister Gonzi said[1].

Malta, 60 miles away from Italy’s southernmost point and 180 miles from North Africa, has moved from being an offshore corporate services centre to an onshore financial services jurisdiction. Over the past two decades, it has reformed its finance sector legislation in line with international best practice and is now internationally recognised as a brand denoting excellence in financial services.

It offers financial services operators looking for a European Union-compliant, flexible, domicile, and an attractive cost- and tax-efficient base.

Malta, for the past few years, has been contemplating a new dimension to its successful business model by leveraging its physical location as well as its close ties with the Middle East and North Africa to become a regional hub for Islamic finance[2].

The Malta Financial Services Authority

In 2008, the Malta Financial Services Authority (MFSA), set up an expert group and issued a consultation process to analyse the changes that are required in Maltese legislation in order to facilitate the licensing of Islamic Financial Institutions and in June 2008, the MFSA issued a consultation document on the application of Islamic Finance to Banking & Securities in Malta.

However, the most important development, occurred in March 2010, when the MFSA issued a ‘Guidance Note for Shari’ah Compliant Funds’ setting out how the legal and regulatory framework established under the Investment Services Act would apply to Shari’ah-compliant funds established under Maltese law.

As a result, the MFSA is the only regulator in a European Union jurisdiction that has issued formal guidelines on the establishment and administration of Shari’ah-compliant funds.

The Guidance Notes place Malta in a unique position where Islamic finance is placed on a level playing field with conventional finance – in fact the principle underlying the Guidance Notes is that Shari’ah-compliant funds are regulated in the same manner as conventional funds in the same category. The Guidance Notes seek to act as the guiding light to fund promoters by highlighting those issues which the MFSA expects Shari’ah-compliant funds to address as part of the process leading to their licensing under the Investment Services Act[3] and their regulation in terms of the Standard Licence Conditions issued thereunder.

Malta’s funds landscape is divided into Professional Investor Funds (PIF) and retail funds (which in turn are divided into UCITS[4]retail funds and non-UCITS retail funds. The PIF regime, as opposed to the retail fund regime which has a higher level of investor protection due to the assumed lower understanding of risk element by retail investors, allows managers and promoters to innovate and to develop new products. Even within the PIF regulatory framework, the level of regulation depends on the type of investors targeted; a distinction is made between PIF promoted to “Experienced Investors”, PIF promoted to “Qualifying Investors” and PIF promoted to “Extraordinary Investors”.[5]

In terms of the Guidance Notes, Ijarah, Murabaha and commodity funds set up as Shari’ah-compliant funds can only be set up as professional investor funds; whereas equity funds set up as Shari’ah-compliant funds can be set up under both the retail regulatory framework as well as under the PIF regime.

This compares favourably with the worldwide general trend of asset classes invested in by Shari’ah-compliant funds. According to an Occasional Paper entitled ‘Islamic Finance in Europe’ prepared by a team led by Filippo di Mauro from the European Central Bank[6], close to 50% of Shari’ah-compliant funds established worldwide are invested in equity as the primary asset class.

The Guidance Notes also deal with the responsibility for compliance with Shari’ah principles (which must comply with the prevailing regulatory and statutory requirements). The MFSA disclaims any responsibility in this regard, including any liability with respect to the assessment of the competence of the fund’s Shari’ah advisors, and requires the fund’s managing body to assume responsibility for such compliance.Shari’ah-compliant funds must necessarily appoint a Shari’ah Advisory Board (SAB) which must be composed of at least two internationally recognised Shari’ah scholars. The SAB must be independent from the fund’s manager. The Guidance Notes also allow a degree of flexibility in that a fund may appoint a legal entity which will, in turn, appoint the SAB and which may replace, at its absolute discretion, members of the SAB with other members of equal standing and reputation. The Guidance Notes shed some light on what the regulator expects the role of the SAB to be (by way of example, the SAB cannot give investment advice and should monitor the fund on an ongoing basis for compliance with Shari’ah principles) and what disclosures should be made in the fund’s offering memorandum or prospectus.

The audited financial statements of a Shari’ah-compliant fund are also required to include an opinion by the SAB as to whether the fund complied with the Shari’ah-principles and guidelines during the period under review.

The Guidance Notes were the main topic of discussion during a recent educational clinic on Shari’ah-compliant funds organised by Finance Malta, a public-private initiative set up to promote Malta as an international financial centre, and the Malta Funds Industry Association (MFIA), which brings together operators in the areas of fund management, fund administration, custody and other service areas.

The North African Market

The educational clinic highlighted the opportunity Malta presents to asset managers specialised in Islamic funds with access to the European market and, through it, the global market, especially with opportunities arising following recent developments in North Africa.

Libya’s recent adoption of Law No. 1 of 2013 which prohibits interest in all civil and commercial transactions as from 1 January 2015 was presented as an example of such opportunities. This law is expected to constrain Libyan courts to invalidate interest clauses in international syndicate loans, even if governed by a law other than Libyan law, given that they would likely deem the prohibition to be a matter of public policy.

In fact, earlier this year, the Libya Herald reported that the Central Bank of Libya had given its approval to a US$ 125 million Shari’ah-compliant real estate fund (also listed on the Tripoli Stock Exchange) which will invest in four pre-defined mixed use commercial and residential real estate projects in both Tripoli and Benghazi.

Libya’s deepening turmoil (which might also mean that Law No. 1 of 2013 is not implemented, is amended or revoked by the time it should come into force) may mean that promoters may wish to domicile their Shari’ah-compliant funds in safe European domicile such as Malta.

If a number of conventional institutions were planning to offer a global syndicated (conventional) loan to finance aircrafts in Libya. The effect of Law No. 1 of 2013 on financing such transactions is potentially far-reaching. Malta offers the possibility of the same financing transaction taking place via a Shari’ah-compliant aircraft leasing investment fund domiciled offshore (in Malta).

Shari’ah-compliant banks and aircraft manufacturers could potentially participate – as investors and strategic partners – in a Malta-based Shari’ah-compliant investment fund that would acquire and own aircrafts which would then be leased by the same fund to airline companies in Libya and possibly other Islamic economies.

This is just one example of how Malta’s flexible yet robust regulatory framework and extensive double taxation treaties as well as its strategic geographical proximity could be used to bridge the conventional world with the realities of new Islamic economies and offer innovative financing models.

Such structures could also address major infrastructure and project finance needs in North Africa and beyond.

It is important to note that Europe is not completely new to Shari’ah-compliant funds. In the earlier quoted Occasional Paper[7], it was reported that European Islamic funds represent around 8.3% of the global Islamic fund industry, with Ireland and Luxembourg accounting for 7% alone.

As Malta joins Luxembourg and Ireland as one of the leading European fund domiciles, it would be interesting to note how Malta shall take advantage of its proximity and affinity to the Arab and Muslim world and become a European hub for Shari’ah-compliant funds.

After all, perhaps it is Malta’s everlasting vocation, as a centuries-old trading post in the middle of the Mediterranean, to act as the melting pot of conventional finance and the workings of Islamic finance.



[1] Hedge Funds Review – The Voice of the Alternative Investment Industry – Malta Supplement 2009/2010 p.6

[2] Lindsay, M ‘Malta’s finance minister sees hedge fund development as key part of financial services’, Hedge Funds Review (20 December 2011) (accessed online on 13 October 2014)

[3] Chapter 370 of the Laws of Malta

[4] Undertakings for Collective Investments in Transferable Securities which are investment funds that exist within a harmonised European regulatory framework allowing distribution of their units throughout the European Union.

[5] An analysis of the fund regulatory regime is beyond the scope of this article; however, the MFSA has published “A Guide to the Establishment of Professional Investor Funds” which sets out the salient features of the PIF regime which can be accessed here:

[6] This Occasional Paper may be accessed on The Occasional Paper does not represent the views of the European Central Bank (ECB) and the views expressed therein are those of the authors and do not necessarily reflect those of the ECB.

[7] This Occasional Paper may be accessed on The Occasional Paper does not represent the views of the European Central Bank (ECB) and the views expressed therein are those of the authors and do not necessarily reflect those of the ECB.